The 2006/07 tax year ends on Thursday, 5 April. Here's how to grab your tax allowances, including ISAs, before they're gone.
Just in case you weren't aware, the 2006/07 tax year ends on Thursday, 5 April. Also, for the first time since the Pay As You Earn (PAYE) tax system was introduced in 1944, the new tax year begins on Good Friday. This might mess up the payroll and tax systems at some small businesses, so be warned!
Anyway, with only a few precious hours remaining until the end of this tax year, it's worth putting aside a few minutes -- or even an hour or two -- to do some last-minute tax planning. Do your homework now and you could see your tax bill for 2006/07 fall by hundreds (or even thousands) of pounds.
Here are a few suggestions to help put your financial affairs in order:
1. Individual Savings Accounts (ISAs)
Savers and investors can shelter up to £7,000 per tax year inside a popular tax-free shelter known as an ISA. If you're a keen stock-market investor, you can put the full £7,000 into stocks and shares. On the other hand, if prefer to be a bit more cautious, then you can put up to £3,000 in cash and £4,000 into shares.
All interest, dividends (the income paid by shares) and capital gains (the increase in value of shares, bonds, etc.) are tax free inside an ISA, which helps your money to grow faster. Furthermore, you don't have to declare ISA income and gains on your tax return, which means less paperwork and less hassle from the taxman.
If you're interested in stashing cash inside ISAs, then read our guide to Best Buy cash ISAs. If you prefer to invest in the stock market for superior long-term returns, then read this article on shares ISAs.
2. Pump up your pension
Earnings from employment are subject to income tax and National Insurance Contributions (NICs). How much tax and NICs you pay will depend on your status (employed or self-employed) and how much you earn. Naturally, the more that you earn, the more tax you pay. Most workers pay tax at the basic rate, which is 22%. However, around one in nine workers (11%) pay tax at the higher rate of 40%.
One way to reclaim this tax is to make contributions to a company, personal or stakeholder pension. If you're a basic-rate taxpayer, contributing £78 into a pension will earn you tax relief of £22, making your total contribution a nice, round £100. If you're a higher-rate taxpayer, then you need put in only £60 in order to get £40 of tax relief (some of which you'll have to claim back via your Tax Return or a Form PP120).
So, if you've had a good year and have a few pounds left to spare, then popping it into a pension before 6 April will bring down your tax bill for this year. Also, it's worth noting that all UK residents (even children and non-workers) can invest in pensions, up to a maximum contribution of £3,600 per tax year including tax relief.
For example, I've recently opened ultra-low-cost pensions for my young son and daughter. My contribution of £2,808 per child attracts automatic tax relief of £792, which means that my children now have £3,600 apiece to grow over a period of, say, sixty years or more!
3. Settle up with your spouse
All adults have a tax-free personal allowance, which is worth £5,035 to those under 65 in the 2006/07 tax year. Thus, if you pay tax at a higher rate than your spouse does, consider transferring some income-earning assets (cash deposits, shares, bonds, etc.) into his/her name. By doing this, you reduce your overall tax bill as a couple, but this must be a 'gift without reservation'. In other words, you need to be able to trust your other half not to do a runner with the loot!
4. Be generous with Gift Aid
Making donations to charity can also shrink your tax bill. With Gift Aid, every £1 donated by a UK taxpayer turns into £1.28, thanks to automatic tax relief of 22% (because £1/78%=£1.28). What's more, higher-rate taxpayers can offset a further 18% of this total against their tax bill, which saves them an extra 23p (18% x £1.28) per £1 donated. So, it's possible to be generous to good causes and save tax, too.
You should be aware that you can elect for the gift to be treated for tax purposes as if it was paid in the previous tax year. Hence, even gifts made after 6 April can be offset against your 2006/07 tax bill.
5. Cut your Capital Gains Tax (CGT) bill
Each UK resident has a personal allowance to offset against capital gains (profits made on the sale of assets), which is worth £8,800 in this tax year. You can minimise your CGT bill by:
- selling assets up to your annual allowances, in order to 'crystallise' some gains;
- selling assets which have fallen in value, in order to offset losses against gains; and
- transferring assets to your spouse (or same-sex Civil Partner) before disposal, in order to make use of his/her CGT allowance.
For tax purposes, if you want to re-buy an investment after selling it, you must wait thirty days before doing so. Alternatively, your spouse or partner can buy it back, or you can re-purchase it inside an ISA or existing Personal Equity Plan (PEP).
6. Reduce your exposure to Inheritance Tax (IHT)
Do you want to lose up to two-fifths of your life savings to the taxman when you die? If not, in Ten Ways To Transfer Wealth, I explained how to transfer money and other assets to your children and other beneficiaries in order to avoid Inheritance Tax. Although every estate has a nil-rate band of £300,000, assets above this threshold could attract a punitive tax of 40% on death. Hence, it makes sense to take full advantage of the £3,000 annual gift exemption and other loopholes in order to reduce your exposure to IHT. A properly worded Will is a must, also.
Finally, don't leave things right until the last minute, because you don't want to be fumbling around trying to fund an ISA with your debit card at 11.59pm on Thursday night!